Exchange-rate Effects on China's Trade


  • We are grateful to Menzie Chinn and to an anonymous referee for suggestions that greatly improved the quality of the paper. We are also grateful to Susan Collins. Morris Goldstein, James Harrigan, Dale Henderson, and Willem Thorbecke for detailed comments. Also, comments from David Bowman, Neil Ericsson, Joe Gagnon, Bill Helkie, Koichiro Kamada, and Steve Kamin are gratefully acknowledged. Earlier versions of this paper were presented at the Fall 2004 Midwest International Economics Group, at the Federal Reserve Board's Workshop series, and at the CPBS 2006 Annual Pacific Basin Conference of the Federal Reserve Bank of San Francisco. The calculations are based on PcGets: see Hendry and Krolzig (2001); and PcGive: see Doornik and Hendry (2000). The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.

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Though China's share of world trade exceeds that of Japan, little is known about the response of China's trade to changes in exchange rates. The few estimates available have two limitations. First, the data for trade prices are based on proxies for prices from other countries. Secondly, the estimation sample includes the period of China's transformation from a centrally-planned economy to a more market-oriented one. We address these limitations with an empirical model explaining the shares of China's exports and imports in world trade in terms of the real effective value of the renminbi. The specifications control for foreign direct investment and for the role of imports of parts to assemble exports. Parameter estimation uses disaggregated monthly trade data and excludes China's decentralization period. We find that a 10 percent real appreciation of the renminbi lowers the share of aggregate Chinese exports by nearly one percentage point. However, the estimated response of imports is negligible and lacks precision.